Emerging Markets Forecast: Hot and Cold

Emerging markets strategists say Latin America has the potential to outperform its developing peers while it may be be wise to pass on India at this point.

The multiyear bull market in commodities has been a boon for emerging markets that have a heavy emphasis on energy and other commodities-related stocks. Brazil's recently touched historic highs while Mexico's has been breaking records for sometime.

"We continue to be quite constructive on Brazil, which has been a major beneficiary of growth in China because of its commodity exports," says George Hoguet, a portfolio manager and emerging markets strategist at State Street Advisors, who also likes Mexico and Peru. "We don’t think China will slow down significantly in the next six months."

Fredric Dickson, chief market strategist at DA Davidson, says investors should take a look at Claymore's BRIC exchange traded fund , which tracks the Bank of New York's index of ADRs for companies in Brazil, Russia, India and China with a heavy weighting towards Brazil.

Meanwhile, a number of strategists are staying on the sidelines with India, which they say has become overheated and overvalued despite a strong long-term outlook.

"India remains one of the most expensive markets in our universe, so we've had a pretty strong underweight in that market," he says.

The most expensive emerging market stocks are in India, where valuation levels have risen to about 17 times future earnings, which is above the broad price-to-earnings ratio in the United States.

"While we like the growth story, we're going elsewhere and see good growth with a better valuation prospect," Gray says.

State Street's Hoguet is also bearish on India, as well as to Malaysia and Taiwan.

"The Indian market is quite expensive now, it sells at a forward price-to-earnings of 17.5 which is greater than the forward P/E in the U.S," Hoguet says.

But Rick Pendergraft, chief investment analyst for Investor's Daily Edge, an investment newsletter, is taking a contrarian approach to the Asian sub-continent.

"I think that India is poised to really grow and is positioned well to take advantage and take their place in the world economy."

A new ETF focusing on India, Pendergraft says, received little fanfare compared with the China ETFs.

"India has dropped of the radar," says Pendergraft. "That's exactly when you're primed to get on.